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Big Government and Big Inflation
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April’s 4.2 percent past year increase in the Consumer Price Index is not likely to dissuade the Federal Reserve from continuing its policy of near-zero interest rates. Fed Chairman Jerome Powell believes the rising prices are just a temporary phenomenon caused by the ending of lockdowns releasing pent-up consumer demand.

Powell may be right that the ending of lockdowns would inevitably be accompanied by a rise in prices. However, this is just the latest reason the Fed has given for putting off increasing interest rates. Powell does not want to admit that the real reason the Fed will continue to keep rates low is that increasing rates will cause the federal government’s interest payments to rise to unsustainable levels.

One way the Fed increases the money supply — and thus lowers interest rates — is by purchasing US Treasury securities. These purchases increase demand for US government debt, keeping government’s borrowing costs low. An expansionary monetary policy thus enables increased federal spending and deficits. Since the lockdowns, the Fed has worked overtime to monetize federal debt, doubling its holdings of Treasury securities.

A Truth in Accounting report from April concluded the real federal debt is 123 trillion dollars — over four times larger than the 28 trillion dollars “official” debt. The higher debt calculation includes the federal government’s unfunded liabilities. The biggest unfunded liabilities are the 55 trillion dollars in promised but unfunded Medicare benefits and the 41 trillion dollars in promised but unfunded Social Security benefits.

Congress could transition away from entitlement and welfare programs without harming current or soon-to-be beneficiaries by cutting spending on militarism and corporate welfare. Part of the savings from these cuts could be used to pay down the debt, and part could be used to provide payments for current and soon-to-be beneficiaries of government programs while we transition to a free market.

Unfortunately, there is not much appetite in Congress for spending cuts. The main Democratic criticisms of President Biden’s 1.52 trillion dollars budget, which increases spending by 8.4 percent, are that Biden is not proposing bigger increases in spending and debt, or in taxes on “the rich.” Biden’s budget increases are in addition to the trillions in other spending Biden is pursuing, including related to Covid, infrastructure, and his “American Families Plan.”

Republicans are making obligatory attacks on Biden’s spending, while also attacking Biden for increasing military spending to “only” 753 billion dollars. Republican complaints about Biden’s big spending ring hollow given their support for Presidents Donald Trump and George W. Bush’s spending increases and Republicans’ proposals to spend billions on infrastructure.

Some conservatives have even embraced the madness of Modern Monetary Theory. These conservatives are urging people to stop worrying about spending and debt and instead figure out how to use Fed-financed government spending to advance conservative ends.

The refusal of Congress to cut spending means the Fed will keep increasing its balance sheet in an effort to monetize skyrocketing debt. Eventually, the increasing debt and inflation will lead to a major economic meltdown. The meltdown will likely include a rejection of the dollar’s world reserve currency status.

The only way to avoid the crash is to spread the truth among enough people to force Congress to reverse course. Early steps in reversing course are blocking Biden’s big spending plans and passing Audit the Fed so the American people can finally know the truth about the Federal Reserve’s actions.

(Republished from The Ron Paul Institute by permission of author or representative)
 
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  1. As usual, Ron Paul can see what’s coming and nails it in this column. Regarding the bind that the FED and US Gov’t are in with interest rates, one can see the problem from, believe it or not, just the pie charts near the back of the IRS 1040 instruction book and a calculator. See Peak Stupidity‘s recent post “EXTRA, EXTRA, IRS tells all! (in .pdf 1040 Instructions)” No differential equations required! From that post:

    The absolute amount of interest paid in ’19, that $360 Billion is 63% higher than that $220 Billion in ’15, an additional $140 Billion. Just that amount of additional interest is more than the Total US Debt amount in 1943, in the middle of WWII! Oh, but a buck isn’t worth nearly as much, so why compare? That’s one point of this all, pointing out that the US dollar is being made worthless. The other is that the FED is in, or has put the Treasury Department in, a real pickle. If the interest rates were let to rise to natural levels, the price of money, the whole budget collapses. Imagine rates of 7%, likely only 3 points above the REAL inflation level. That’s 4 3/8 times the interest, meaning that 8% of the pie goes to 35% of outlays!

    This comparison to 4 years back is bad enough, but it doesn’t even include the financial shitshow that is the still-on-going Kung Flu PanicFest. PS will have a comparison of some numbers from the last 10 years’ budgets soon enough.

    I guess I gotta say this 90% of the time here, but that last paragraph, Dr. Paul, is something we will only see in dreamland. We’re not dealing with the same American people to spread this truth to, as if it were 1960.

    • Replies: @Mark G.
  2. Uncle Fester has the Hots for Canada and notes that Canada ( Small country–understands human rights and democracy) is over 1 Trillion in Debt and prize province Alberta ( Canada’s supposed cash cow ) is 100 Billion in Debt —-but it was 0 in 2004?? I told Fester to stop quibbling over chicken feed —-study the USA’s numbers —- Then Fester yells at me that 0 interest rates can not last forever—-but I countered him stating —if 0 interest rates last another 40 years –we will not have to worry. Someone else will –enjoy it when interest rates rise—until then —enjoy.

  3. It’s not the fault of big government itself. Combine Keynes’s The General Theory of Employment, Interest and Money with Michael Hudson’s advice to be found in his articles on this site and his books, not allowing the financial system to be parasitic, writing off debt where there is reasonable cause.

    All that means government and regulation. I think your small is better ideology is too simplistic.

    Disclaimer: I am not an economist. Correct me if I’m wrong.

  4. No 1 — I agree with Ron when he attacks government money wasted…. ie bloated military etc budgets. But…..
    “Fed Chairman Jerome Powell believes the rising prices are just a temporary phenomenon caused by the ending of lockdowns releasing pent-up consumer demand.”
    The Fed chairman (& Ron) have an agenda. The “dangerous” inflation is actually supply sided. Start with the car market & housing market & blockages in computer chips & lack of basics like lumber.
    Check Jack Rasmus — one of the best economists around.

    “A Truth in Accounting report from April concluded the real federal debt is 123 trillion dollars — over four times larger than the 28 trillion dollars “official” debt. The higher debt calculation includes the federal government’s unfunded liabilities. The biggest unfunded liabilities are the 55 trillion dollars in promised but unfunded Medicare benefits and the 41 trillion dollars in promised but unfunded Social Security benefits”
    Oh my God! The old “unfunded liabilities ” argument. Ron, US GDP is at least 20 trillion, IF it invests it’s $$ in productive — needed things (a bridge maybe?) the dollar will retain its value & the Gov (Fed/treasury) can afford to “print” with in limits. (the US as a Sovereign can “borrow” from itself)
    MMT is accurate — but it depends on the productivity of the $$ print….
    Sadly, the US wastes trillions on its fat bloated oligarchs & stupid shit like Israel, F35’s & another nuclear weapon update….
    If “crash test dummy” (pepe’s coinage, I think) Biden actually spent some $$ on actually investing in the US then inflation & rates would not be an issue.

  5. “Congress could transition away from entitlement and welfare programs…”

    How about doing away with ALL of the “entitlement” programs:

    1. 95% of the funding for the military’s illegal & immoral WARS
    2. the absolutely useless government “agencies” – CIA, FBI, NSA, DHS, etc.
    3. the lowest EFFECTIVE corporate income tax rates since the end of World War II
    4. the lowest “real” personal income tax rates since the end of World War II for the wealthy
    5. the tax breaks for the financial “industry” criminals
    6. etc., etc., etc.

    I could go on and on but it would be pointless. Congress is going to do NOTHING, because it is part of the “system” – from which the members of Congress receive their pay checks. The entire “system” is corrupt to the core and BOTH political parties are part of that “system.” As the old saying goes, it is very difficult to know something, when your pay check depends on you not knowing it…

    Put very simply, what the government should be doing, it is not doing; what it should not be doing, it is doing.

    Thank you.

  6. Mark G. says:
    @Achmed E. Newman

    I guess I gotta say this 90% of the time here, but that last paragraph, Dr. Paul, is something we will only see in dreamland. We’re not dealing with the same American people to spread this truth to, as if it were 1960.

    This is true but Dr. Paul and others of his ilk serve a purpose. Eventually we may return to sanity and if we do it will be because of people preaching the truth. It also helps me from a psychological standpoint that there are still others who think as I do and that I’m not alone.

    Imagine how it must have felt in Germany in the early nineteen thirties where classical liberalism had almost entirely disappeared and Nazis and Communists were your main choices on who to vote for. We are headed in that direction here in the U.S. with increasing numbers of far rightists and far leftists both preaching violence and increased government and ignoring or disparaging the ideas of the Founders. If you only follow the mainstream media you would come away with the impression it’s only the far right that is a problem but the reality is that the far left Antifa and BLM types, instead of engaging in “mostly peaceful” protests, are also committing widespread violent acts.

    • Replies: @Jokem
    , @Achmed E. Newman
  7. Jokem says:
    @Mark G.

    I think it has went too far to be reversed. Maybe the few calling ‘foul’ on this headlong trend to statism will be listened to, but I think there will be an upheaval of some sort with a strongman coming out on top, dictatorship.

  8. @Mark G.

    Mark, don’t get me wrong. I’m very glad Ron Paul is still writing and doing his youtube “TV” show called the Liberty Report. His spreading of the truth is a good thing. I just notice that in the optimistic last paragraphs he has in most of his columns, he acts like we will be able to nicely and purely politically turn this ship around. No, we are beyond that. There will be a lot of turmoil between now and seeing anything like the Founders created again.

    The problem is not the far right. Just as in Nazi Germany, the far right* became powerful as a reaction to the far left. Of course, the far right went too far. It’s possible they could have restored a Republic of some sort, but first the Commies had to be dealt with, which required authoritative powers. I don’t want the same thing to happen here, but something will have to stop the ctrl-left pretty soon, or that WILL be the only choice left.

    “Those who make peaceful revolution impossible will make violent revolution inevitable”

    – John F. Kennedy, of all people

    .

    * I don’t think the Libertarians like Ron Paul would call them the far right, BTW.

    • Agree: Mark G., Adam Smith
    • Replies: @Mark G.
  9. Mark G. says:
    @Achmed E. Newman

    I don’t think the Libertarians like Ron Paul would call them the far right, BTW.

    Achmed, I think I agree with that. The Hitler fanboys you see sometimes here at unz.com are far right but Trump supporters certainly aren’t. I’m old enough to remember Pat Buchanan being labeled far right by the left and Pat wasn’t far right either.

    Pat and other conservatives like him, if they had any sympathy for fascism at all, it would have been of the mild Franco variety. I visited Spain in the early seventies when it was still under Franco. I was expecting a repressive police state but was surprised to find it was a pleasant place. It was a good thing for Spain Franco won the Spanish Civil War. I wouldn’t want a Franco here in the U.S. but you could certainly do worse. Hitler was certainly awful, though probably not as bad as our World War II ally Stalin.

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